THE ECONOMY

Although some early analyses of the economic prospects of an independent Ukraine painted a fairly optimistic picture,6 more realistic prognoses indicated that the country would find the transition to a market economy difficult. In 1991 Ukraine's industrial infrastructure was outdated, energy-intensive, and heavily polluting; even Ukraine's well-known agricultural potential had been negatively affected by extensive soil pollution and erosion as well as an aging rural work force.7 In addition, Ukraine was burdened with a large proportion of the Soviet Union's inefficient military industrial complex and with the devastating (and costly) legacy of the Chernobyl nuclear station disaster.8

Thus Ukraine's economy was in poor shape when the country became an independent state in 1991, but the country's leaders made a bad situation much worse. In particular, Ukraine's first president, Leonid Kravchuk, was reluctant to make a clean break with the old Soviet establishment, made poor use of the expertise of reform-minded advisers, tolerated massive corruption at all levels of government and among his closest advisers, and had little interest in economic policy. As a result, the deterioration of Ukraine's economy, which had commenced well before the country gained independence, greatly accelerated after 1991. All Western and Ukrainian evaluations agree that this precipitous decline had a devastating impact on all sectors of the economy and the population's living standards. For example, wages are so much higher in Russia that large numbers of Ukrainian citizens now work there illegally or semilegally, and the conditions in which they work are often very poor.9 There has also been a significant brain-drain of scholars and highly qualified technical personnel from Ukraine.10

Ukraine's economic problems were exacerbated by certain external factors, such as the impact of rising prices of energy imports from Russia under its terms of trade. In addition, given the tremendous challenge of restructuring the hidebound Ukrainian economy, a certain economic decline was inevitable no matter what policies were adopted. However, Ukraine's first post-independence leaders behaved in an irresponsible fashion and contributed to this decline by conducting a loose monetary policy until the end of 1993, incurring massive budget deficits, and failing to introduce a coherent reform program. These and other factors led to a very great fall in production in almost all sectors of the economy.11

Ukraine's first 2 years of independence were marked by hyperinflation, limited economic liberalization, large credits to heavy industry and the agricultural sector, and irrationally confiscatory taxation. As a result of numerous and often confusing regulations, especially on foreign trade, many top government officials quickly took advantage of this situation to enrich themselves, and the limited privatization carried out primarily benefitted former state officials.12

The prospects for meaningful economic reform did not improve significantly until the summer of 1994, with the election of Ukraine's second president Leonid Kuchma, who made the improvement of the economy his top priority. After quickly initiating an anticrime and anticorruption campaign, he assembled a number of young reform economists, and three members of this group were added to the government: First Deputy Prime Minister Viktor Pynzenyk, Deputy Prime Minister Igor Mitiukov, and Minister of Privatization Yurii Yekhanurov. In conjunction with the incumbent Minister of Economy Roman Shpek and Viktor Yushchenko, the chairman of the National Bank of Ukraine, they comprised a powerful reform team.

President Kuchma presented his economic reform plan to the Ukrainian parliament in October 1994. It entailed a rapid transition to a market economy, and included the liberalization of all prices with the exception of natural monopolies, deregulation of domestic trade, a significant liberalization of foreign trade, significant tax reform with sharp tax reductions, mass privatization, and private ownership of land. Shortly afterward, Ukraine's parliament voted in favor of the reform program. Although most of the large number of left-leaning legislators disagreed with many elements of this program, they generally lent it their support because no viable alternative existed.

In September 1994, Ukraine's representatives and the International Monetary Fund (IMF) reached an agreement at staff level on a Systematic Transformation Facility (STF), and in late October of that year the agreement was aproved by the IMF board. Ukraine committed itself to unifying the exchange rate, doing away with import subsidies, raising or liberalizing key prices (notably of food, energy, and communal services), and liberalizing exports. Ukraine's representatives also promised to reduce the country's budget deficit for 1994 to 10.3 percent of GDP.

Implementation of these reform measures has taken place roughly as promised. By March 1995 the exchange rate had essentially been unified and all import subsidies abolished. Prices, domestic trade, and foreign trade are at least formally liberalized, and energy prices for enterprises have been allowed to reach world levels. The only significant subsidies are for rent, household energy, and collective transport, and from January 1995 export quotas and licenses have been limited to four commodity groups, scrap metals, and grain.13

There has also been considerable success in obtaining international financing to support reform plans. In the fourth quarter of 1994, the IMF took the lead to raise a total of $1 billion to finance Ukraine's balance-of-payments deficit from the beginning of the STF program, although only approximately two-thirds of the financing materialized. The IMF and Ukraine then negotiated a full-fledged standby program, which was to lead to the full stabilization of Ukraine's currency. The key feature of this program was a predicted 1995 budget deficit of approximately 5 percent of GDP; it foresaw the abolition of virtually all government subsidies, including those to agriculture and coal.

This austere program came under considerable criticism in the Ukrainian parliament but it gave its final approval to the 1995 budget in April 1995, thus meeting a vital precondition for a $1.8 billion IMF credit. This will help a great deal to satisfy Ukraine's gross 1995 financing needs, which totalled approximately $6 billion, according to Anders Aslund, the senior Western economic adviser to President Leonid Kravchuk. Most of the remaining financing needs are being met by contributions from the World Bank and the European Bank for Reconstruction and Development and by a rescheduling of debts by Turkmenistan and Russia.

It is not clear whether Ukraine will receive all the financing aid promised, and the debt rescheduling agreement with Russia can always be held hostage to a deterioration in Russian-Ukrainian relations. Nonetheless, representatives of institutions such as the IMF and World Bank have shown great confidence in the ability of Ukraine's economic reform team to hold to its current program, and Ukraine has now received most of the support it needs to press ahead with its reform program. In addition, in early April 1995 Ukraine's parliament accepted the resignation of Prime Minister Vitalii Masol, who had been appointed by former President Leonid Kravchuk, and passed a no-confidence vote in the government he had headed. President Kuchma now has greater freedom to appoint a strong team of reformist ministers to a new Cabinet of Ministers.

These recent positive developments by no means guarantee the success of President Kuchma's reform program. In particular, in April 1995 it was still not clear whether President Kuchma would receive the additional executive powers he needs to fully implement his plans. Even if these powers are granted, a great deal will depend on public reactions to the additional hardships (e.g., large-scale unemployment) that will accompany the new austerity regime being imposed on Ukraine, and on whether social peace can be maintained during the next phase of the country's transition to a market-type economy. In addition, although few corruption scandals have affected the reputation of President Kuchma's reform team, only a modest beginning has been made to deal with the massive network of corrupt activities that has been a major drain on Ukraine's economy and has greatly demoralized society at large.

Last, the rapid implementation of economic reforms will require at least the grudging cooperation of regional elites and midlevel bureaucrats throughout Ukraine. Reform-minded elites are quite strong in some regions of Ukraine, including, paradoxically, some of the industrial centers of eastern Ukraine.14 However, in other regions and in Ukraine's rural areas, where most of the population is still employed on old-style collective farms, strong resistance to reforms can be expected.

Some setbacks will be inevitable. From the beginning of his term in office, however, President Kuchma, in contrast to his predecessor, has made the revival of Ukrainian economy his top priority, and he has not wavered from the reform platform initially enunciated in October 1994.15 This priority has even been reflected in the activities of Ukraine's diplomatic service, which has reoriented its activities to focus much more attention on trade promotion and attracting foreign investment in the Ukrainian economy.16 Thus the reform team now guiding Ukraine's economic development is doing a great deal to create the conditions that will allow for a gradual revival of Ukraine's economy.